Journal of Economic Perspectives—Volume 14, Number 3—Summer 2000—Pages 217–232 History Lessons Institutions, Factor Endowments, and Paths of Development in the New World Kenneth L. Sokoloff and Stanley L. Engerman This occasional feature will discuss episodes and events drawn from economic history that have lessons for current topics in policy and research. Responses to this column and suggestions for future columns should be sent to Kenneth Sokoloff, Department of Economics, University of California—Los Angeles, 405 Hilgard Ave., Los Angeles, CA 90095-1477. Introduction As Europeans established colonies in the New World of North and South America during the sixteenth, seventeenth, and eighteenth centuries, most knowl- edgeable observers regarded the North American mainland to be of relatively marginal economic interest, when compared with the extraordinary opportunities available in the Caribbean and Latin America. Voltaire, for example, considered the conflict in North America between the French and the British during the Seven Years’ War (1756-63) to be madness and characterized the two countries as “fight- ing over a few acres of snow.” The victorious British were later to engage in a lively public debate over which territory should be taken from the French as repara- tions—the Caribbean island of Guadeloupe (with a land area of 563 square miles) or Canada (Eccles, 1972; Lokke, 1932). Several centuries later, however, we know that the U.S. and Canadian economies ultimately proved far more successful than the other economies of the hemisphere. The puzzle, therefore, is how and why the y Kenneth L. Sokoloff is Professor of Economics, University of California, Los Angeles, California. Stanley L. Engerman is John H. Munro Professor of Economics and Professor of History, University of Rochester, Rochester, New York. Both authors are Research Associates at the National Bureau of Economic Research, Cambridge, Massachusetts. 218 Journal of Economic Perspectives areas that were favored by the forecasters of that era, and the destinations of the vast majority of migrants to the Americas through 1800, fell behind economically. Systematic estimates of per capita income over time have not yet been con- structed for many economies, and those that exist are rough, but Table 1 conveys a sense of the current state of knowledge for a selected group of New World countries relative to the United States. The figures suggest that the economic leadership of the United States and Canada did not emerge until several centuries after the Europeans arrived and began establishing colonies. In 1700, there seems to have been virtual parity in per capita income between Mexico and the British colonies that were to become the United States, and the most prosperous econo- mies of the New World were in the Caribbean. Barbados and Cuba, for example, had per capita incomes that have been estimated as 50 and 67 percent higher, respectively, than that of (what was later to be) the United States. Although the latter economy may have begun to grow and pull ahead of most economies in Latin America by 1800, it still lagged behind those in the Caribbean, and Haiti was likely the richest society in the world on a per capita basis in 1790, on the eve of its Revolution (Eltis, 1997). It was not until industrialization got under way in North America over the nineteenth century that the major divergence between the United States and Canada and the rest of the hemisphere opened up. The mag- nitude of the gap has been essentially constant in proportional terms since 1900. These differentials in paths of development have long been of central concern to scholars of Latin America and have recently attracted more attention from economic historians and economists more generally (North, 1988; Engerman and Sokoloff, 1997; Coatsworth 1993, 1998; Acemoglu, Johnson and Robinson, 2000; Engerman, Haber and Sokoloff, 2000). Although conventional economic factors have certainly not been ignored, the explanations offered for the contrasting records in growth have most often focused on institutions and highlighted the variation across societies in conditions relevant to growth such as the security of property rights, prevalence of corruption, structures of the financial sector, invest- ment in public infrastructure and social capital, and the inclination to work hard or be entrepreneurial. But ascribing differences in development to differences in institutions raises the challenge of explaining where the differences in institutions come from. Those who have addressed this formidable problem have typically emphasized the importance of presumed exogenous differences in religion or national heritage. Douglass North (1988), for example, is one of many who have attributed the relative success of the United States and Canada to British institu- tions being more conducive to growth than those of Spain and other European colonizers. Others, like John Coatsworth (1998), are skeptical of such generaliza- tions, and suggest that they may obscure the insight that can be gained by exam- ining the extreme diversity of experiences observed across the Americas, even across societies with the same national heritage. Indeed, a striking implication of the figures in Table 1 is that the relationship between national heritage and economic performance is weaker than popularly thought. During the colonial period, the economies with the highest per capita Kenneth L. Sokoloff and Stanley L. Engerman 219 Table 1 The Record of Gross Domestic Product per Capita in Selected New World Economies, 1700–1997 GDP per capita relative to the U.S. 1700 1800 1900 1997 Argentina — 102 52 35 Barbados 150 — — 51 Brazil — 50 10 22 Chile — 46 38 42 Cuba 167 112 — — Mexico 89 50 35 28 Peru — 41 20 15 Canada — — 67 76 United States (GDP p.c. in 1985$) 550 807 3,859 20,230 Notes and Sources: The relative GDP per capita figures for Latin American countries come primarily from Coatsworth (1998). Coatsworth relied extensively on Maddison (1994), and we draw our estimates for Canada and the United States in 1800 and 1900 from the same source (using linear interpolation to obtain the 1900 figures from 1890 and 1913 estimates). The GDP per capita estimates for Barbados in 1700 are from Eltis (1995). The 1997 figures are based on the estimates of GDP with purchasing power parity adjustments in World Bank (1999). Since there was no adjustment factor reported for Barbados in that year, we used that for Jamaica in our calculations. The 1700 figure for the United States was obtained from Gallman (2000), by projecting backward the same rate of growth that Gallman estimated between 1774 and 1800. Maddison (1991) has published alternative sets of estimates, which yield somewhat different growth paths (especially for Argentina) during the late nineteenth and early twentieth centuries, and he has a more positive assessment of Brazilian economic performance during the early nineteenth century than does Coatsworth, but the qualitative implications of the different estimates are essentially the same for our purposes. incomes were those in the Caribbean, and it made little difference whether they were of Spanish, British, or French origin. The case for the superiority of British institutions is usually based on the records of the United States and Canada, but the majority of the New World societies established by the British—including Barbados, Jamaica, Belize, Guyana, and the lesser-known Puritan colony on Providence Is- land—were like their other neighbors in not beginning to industrialize until much later. Having been part of the British Empire was far from a guarantee of economic growth (Greene, 1988; Kupperman, 1993). Likewise, there was considerable diver- sity across the economies of Spanish America. This is most evident in the contrasts between the experiences of the nations of the southern cone and those with large populations of Native American descent, such as Mexico or Peru. It is the former class of countries, including Argentina, that of all the other economies of the New World most closely resemble the United States and Canada in experience over time. With the evidence of wide disparities even among economies of the same European heritage, scholars have begun to reexamine alternative sources of dif- ferences. Though not denying the significance of national heritage, nor of idio- 220 Journal of Economic Perspectives syncratic conditions that are unique to individual countries, they have begun to explore the possibility that initial conditions, or factor endowments broadly con- ceived, could have had profound and enduring impacts on long-run paths of institutional and economic development in the New World. Economists tradition- ally emphasize the pervasive influence of factor endowment, so the qualitative thrust of this approach may not be entirely novel (Baldwin, 1956; Lewis, 1955; Domar, 1970). What is new, however, is the specific focus on how the extremely different environments in which the Europeans established their colonies may have led to societies with very different degrees of inequality, and on how these differ- ences might have persisted over time and affected the course of development through their impact on the institutions that evolved. In particular, while essentially all the economies established in the New World began with an abundance of land and natural resources relative to labor, and thus high living standards on average, other aspects of their factor endowments varied in ways that meant that the great majority were characterized virtually from the outset by extreme inequality in wealth, human capital, and political power. From this perspective, the colonies that came to compose the United States and Canada stand out as somewhat deviant cases. From Factor Endowments to Inequality The “discovery” and exploration of the Americas by Europeans was part of a grand, long-term effort to exploit the economic opportunities in underpopulated or underdefended territories around the world. European nations competed for claims and set about extracting material and other advantages through the pursuit of transitory enterprises like expeditions as well as by the establishment of more permanent settlements.